Americans owed $1.59 trillion in student loans in the spring of 2022, according to data from the Federal Reserve Bank of New York. Students have taken on this debt for good reason: a bachelor’s degree can significantly boost one’s job prospects and earnings.
Refinancing your student loans can lower your monthly payment, reduce the total interest you pay over time, help you get out of debt faster, or some combination of these depending on the provider and the terms (three examples are discussed below).
Of course, depending on the kind of student loans you have, refinancing could change some terms of repayment for individual loans. Understanding the terms of your student loans and the refinancing possibilities before going through the process is critical.
There are two types of student loans: federal loans, which are made or guaranteed by the U.S. Department of Education, and private student loans, which come from sources such as banks, credit unions, and online lenders. Federal loans include Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans (for parents of dependent students).
If you’re thinking about refinancing your federal student loans to get a lower interest rate, it’s important to understand the borrower protections you may lose if you refinance with a private lender. Also, recent events have prompted some changes in federal student loan programs. (Related: The COVID-19 stimulus package)
Income-based student loan repayment
If your monthly federal student loan payment is higher than you can afford because your income is too low, you may want to enroll in one of four income-driven repayment plans: the Revised Pay As You Earn Repayment Plan (REPAYE Plan), Pay As You Earn Repayment Plan (PAYE Plan), Income-Based Repayment Plan (IBR Plan), or Income-Contingent Repayment Plan (ICR Plan). For example, under PAYE and REPAYE, borrowers can apply to have their student loan payments capped at 10 percent of their discretionary income, according to the U.S. Department of Education.
Direct subsidized loans, also called Stafford loans, are available to undergraduates who demonstrate financial need. If you have one of these college loans, the U.S. Department of Education will pay your loan interest while you’re in school at least half-time, for the first six months after you leave school, and during a period of loan deferment, according to the DoE’s website.
Student loan forgiveness for careers in public service
You may qualify for the Public Service Loan Forgiveness Program if you work full-time for a government or not-for-profit organization or serve full-time in AmeriCorps or the Peace Corps. Once you’ve made 120 payments on your Direct Loans under qualifying repayment plans, which include all of the income-based repayment plans, the rest of your balance may be forgiven if you aren’t in default on your loan.
The Teacher Loan Forgiveness Program may forgive up to $17,500 in federal subsidized or unsubsidized loans (but not PLUS loans) for teachers who work full-time for five consecutive years in a low-income elementary or secondary school or educational service agency.
Deferment and forbearance
Deferment lets you postpone payments on your loan for up to three years without accruing interest during the postponement if you have a Direct Subsidized Loan, Subsidized Federal Stafford Loan, or Federal Perkins Loan. Other types of federal student loans are also eligible for deferment, but they continue to accrue interest during the deferment period. Deferment may be an option if you’re attending school at least half-time, if you’re unemployed, if you’re serving in the military, and under certain other conditions that make it difficult to pay your loan.
If you don’t qualify for a deferment, you may qualify for forbearance. It’s a temporary suspension or reduction in your student loan payments for up to 12 months because of a financial hardship or illness. Interest continues to accrue during forbearance and is added to your loan balance.
Discharge upon death or permanent disability
Federal student loans are discharged when the borrower dies. Parent PLUS loans may be discharged if the parent dies or if the student the loans were for dies. (Related: What happens to student loans when you die)
Borrowers who become totally and permanently disabled will have their Direct Loans, Federal Family Education Loans, and Federal Perkins Loans forgiven.
Losing federal student loan benefits when refinancing with a private lender
“Borrowers who refinance federal student loans are not eligible for any of these benefits, so they really need to consider the trade-offs before refinancing,” said Andrew Josuweit, founder of Student Loan Hero, a website that helps borrowers manage and pay off their student loans.
“Borrowers should realize that they can pick and choose which student loans to refinance; they are never forced to refinance all of their student loans,” he said. “This means that they can choose to only refinance private student loans and leave federal student loans alone, or they can include some, but not all, federal student loans when refinancing.”
Private refinancing: What’s available?
A variety of banks and financial institutions offer student loan consolidation and refinancing services. The range of services differs from firm to firm as well as the fees, interest rates, and loan terms they apply, but there are some basics that most offer.
For example, SoFi and Earnest are low-rate student loan refinancing companies. Each allows borrowers to refinance both federal and private student loans as well as parent PLUS loans, all typically with no origination, application, or prepayment fees. Their repayment terms and interest rates vary in range, as do the size of the loans they will refinance. And, depending on the loan, they have different age and co-signer restrictions. Look at their websites for the latest information on their offerings. (Related: Should you choose a variable or fixed rate when refinancing a student loan?)
Private student loan benefits
While you’ll lose all the borrower protections associated with federal student loans when you refinance with a private lender, some private lenders offer their own forms of assistance if you experience economic hardship.
With either deferment or forbearance through private lenders, interest still accrues while you aren’t making payments, unlike with federal loans, which sometimes don’t accrue interest during a deferment.
As for death or disability, some private lenders may forgive remaining student loan balances if the student dies or becomes totally and permanently disabled during the repayment period. Policies vary by lender, according to the National Consumer Law Center.
Explore your options
There’s no guarantee that any lender will offer you better terms on your school loans than you have now, but it’s worth shopping around because you could save thousands. Make sure to compare not just your old and new monthly payments, but also your old and new lifetime borrowing costs, to see if you’ll come out ahead in the long run.
That said, sometimes you have to choose the option that’s cheapest in the short term because your cash flow is limited. If your financial situation improves later, you can always refinance again or make additional principal payments to repay your student loans faster and reduce your total interest costs.
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This article was originally published in June 2018. It has been updated.